Midcap and Small Cap Market Cap Fall Analysis and Upcoming Insight

In the last 4 years, every investor was acting or behaving like a Fund Manager who opted for DIY investing. This has led to much of the investing under a herd mentality where the limited circle of knowledge influenced most of the investment decisions. Now the strangest part is that under the current market scenario, the same thing is getting adopted while going for blindfolded redemptions. Financial advisors play a critical role and many investors are now getting back to their roots. What as an investor we are losing and not considering is patience. The Magic period is slowed not over but no more DIY.

The Nifty Midcap 100 index has experienced a significant correction recently. As of mid-November 2024, it had fallen by 11.32% from its record high of 60,925 (reached in late September 2024). By early February 2025, the median fell from the peak for midcap stocks (Nifty Midcap 150) reaching 33.72% (as of February 14, 2025).

This decline translates into a substantial reduction in market capitalization for midcap companies (typically those with market caps between ₹5,000 crore and ₹20,000 crore). The broader market cap drop of 23% (from $5.18 trillion to $3.99 trillion, as you mentioned) includes midcaps, which have been hit harder than large caps due to their higher valuations and sensitivity to market sentiment.

• Reasons for the Fall:
• High Valuations: Midcap stocks had reached historically high valuations (e.g., median PE ratio of 39 for Nifty Midcap 150 as of February 2025), making them vulnerable to corrections.
• FII Selling: Heavy selling by Foreign Institutional Investors (FIIs) since late September 2024, driven by a rally in Chinese markets and global shifts, has pressured midcaps.
• Weak Earnings: Poor Q2 earnings and a slowdown in corporate growth have raised concerns, particularly in sectors like pharma and financials.
• Economic Indicators: Rising retail inflation, a slowdown in high-frequency indicators (e.g., PMI), and no expected RBI rate cuts in FY25 have dampened sentiment.

Small Cap Market Performance

The Nifty Smallcap 100 index has also corrected significantly. As of mid-November 2024, it was down 10% from its September 2024 peak. By February 2025, the median fall from the peak for small-cap stocks (BSE Smallcap) of 38.46% (as of February 14, 2025), indicating a steeper decline than midcaps. Small cap companies (market cap below ₹5,000 crore) have seen a sharper erosion in market cap compared to midcaps, reflecting their higher risk and volatility. Their contribution to the overall market cap drop of 23% is notable, as they are more sensitive to domestic and global economic shifts.

 

Comparative Analysis: Midcap vs. Small Cap

• Extent of Decline:
• Midcaps (Nifty Midcap 150): Median fall of 33.72% from peak (as of February 14, 2025).
• Small caps (BSE Smallcap): Median fall of 38.46% from the peak (as of February 14, 2025).
  Small caps have experienced a steeper decline, reflecting their higher volatility and risk profile.
• Valuation Metrics:
• Midcaps: Median PE ratio of 39 (overvalued relative to historical averages).
• Small caps: Median PE ratio of 29 (still high but lower than midcaps, indicating some small caps might be less overvalued but riskier).

The Nifty 500 was trading at 31x forward P/E (as of February 2025), significantly higher than its 10-year average of 19x. This overvaluation prompted profit-taking and a market correction.

Midcap and small-cap stocks within the Nifty 500, which form a significant portion of the index, had even higher valuations (e.g., median PE of 39 for midcaps and 29 for small caps), making them particularly vulnerable. On the other hand only 22 out of 49 Nifty 50 companies beat forecasts—the lowest in seven quarters (Bloomberg, February 13, 2025). This trend likely extends to the broader Nifty 500, eroding investor confidence.

81% of Nifty 500 stocks—or 404 out of 500 stocks—are trading below their 200-day moving average (DMA). The 200-DMA is a key technical indicator; stocks or indices below this level are considered to be in a bearish trend.

Conclusion

The decline to a combination of FII outflows, weak earnings, and a shift toward large caps. However, some see this as a healthy correction after years of outperformance (midcaps and small caps had risen ~60% since January 2023). Recovery depends on improved earnings, renewed FII inflows, and positive economic indicators (e.g., GDP growth, PMI).  

The biggest question is now whether will they fall more. Well may be or may not be. But we don’t have much positive earnings now to support the 4^th quarter. We might consolidate and remain low but the upside needs more fuel rather than projections. The truth is that the rally of the market has included huge future earnings in advance under the model of forward projections and now the readjustment is going on. The fall is more dependent on multifactor and we have lost all the mechanism of discounting bad news and bad projections. The market is not going to believe so easily the positive projections currently until it tastes the blood. Clients have become impatient and this is the place where they need to control greed, timelines and expectation levels. Well, I find that is the only reason why SIPs are getting closed and switched out just by someone saying something.

However, near-term caution prevails due to high valuations and global uncertainties. The Indian midcap and small-cap segments have seen significant declines, with midcaps falling 33.72% and small caps dropping 38.46% (median from peak as of February 2025). These declines are steeper than large caps (18.43%) and reflect overvaluation, FII selling, and economic slowdown concerns. While the overall market cap has dropped 23% (from $5.18 trillion to $3.99 trillion), midcaps and small caps have borne more of the correction due to their higher risk profiles and inflated valuations. Hence this is the best time to look for quality of stock buying and investing.